As legal experts pour over proposed Rule 151A, insurance carriers are threatening legal action against regulation from the Securities and Exchange Commission. What are the legal issues? First, annuities are exempt from regulation under the Securities Act of 1933. Second, a Safe Harbor Rule 151 already exists which protects certain products from securities regulation. And third, a federal district court has already ruled that index annuities are not securities.
The SEC strategy is essentially to change the definition of an annuity by excluding index annuities. Changing this definition means the exemption which has historically pulled annuities out of securities regulation will no longer apply to index annuities, thus allowing the SEC to begin regulating index annuities. The SEC exemption applies to ‘dogs,’ so the SEC will start calling index annuities ‘cats’ to regulate the product.
A significant legal decision was handed down by the U.S. Supreme Court in 1967. In that case the Court examined whether a product was marketed on traditional insurance themes such as ‘safety’ and ‘security’ or marketed based on prospective growth through sound investment management. The Supreme Court concluded in both lawsuits that insurance regulation was not enough to keep the SEC at bay.
Conspicuously missing from the SEC proposed Rule 151A analysis is reference to one of the strongest court decisions against regulation of index annuities as securities. In 2002, a federal district court in Kentucky examined an index annuity issued by American Equity Investment Life Insurance Company. The allegation in 2002 was that the index annuity was an ‘investment contract’ under the Securities Act of 1933 and therefore subject to SEC regulation. Please note that the SEC proposed Rule 151A is not claiming that an index annuity is an ‘investment contract’ (which is an undefined security in the 1933 Act). Rather, the SEC is proposing that index annuities should be excluded from the definition of annuities. The SEC is trying to find an open window because the front and back doors have been dead bolted.